Monthly Business Survey – October 2011

Conditions soften in October, suggesting growth in the economy is treading water. But, for the second month in a row, confidence has improved. Also tentative signs of Qld re-construction kicking in.

Business conditions softened in October, partly unwinding an improvement in conditions in the previous month, with trend conditions suggestive of an economy that is treading water at present. Overall, activity was fairly mixed in the month, with the improvement in forward orders somewhat at odds with the fall in the stocks index and the decline in capacity utilisation. Nonetheless, the survey’s activity readings, if maintained at current levels, are broadly consistent with underlying demand and GDP (ex. coal) growth of around 31⁄4% in the December quarter (6-monthly annualised rate).

Business confidence strengthened in October, bolstering the sharp pick up in sentiment in September. The improvement in confidence in the month was consistent with increased speculation that the RBA would cut rates (survey conducted prior to RBA’s November Board meeting, when rates were cut by 25bp to 4.5%), while European Finance Ministers appeared to be taking more decisive steps to try to resolve European sovereign debt problems and more favourable activity data out of the US appeared to have allayed fears of a double dip recession.

Business conditions deteriorated for the majority of industries in October, with the exception of construction, where activity strengthened significantly – it appears that the Queensland reconstruction effort may be starting to kick in. During October, there were large declines in mining and transport & utilities conditions. Overall, manufacturing, retail and wholesale conditions remained fairly subdued.

Labour costs growth continued to soften in October, which was consistent with the recent deterioration in employment conditions. Final product prices and retail prices were very subdued.

Implications for NAB forecasts:

The outlook for growth varies across global economies, with China looking solid, the US economy expanding at a moderate pace but intensifying concerns over the Euro-zone outlook. We have slightly revised our forecasts, lifting US and Chinese growth for 2011 but marking down Euro-zone predictions to show a mild recession starting around the end of the year. We have also lowered Asian Tiger growth to take account of the floods in Thailand and softer trends in the region’s export-led economies. Overall, growth is expected to remain around 33⁄4% in 2012, which is close to trend but very dependent on rapid growth in the big emerging economies.

We have revised core inflation (ex carbon tax) forecasts lower, with inflation of 2% expected over 2012, drifting up to 3% by mid-2013. We tentatively expect another 25bp rate cut in February 2012, although this will be data dependent. We are generally more bullish on near-term growth than the RBA’s latest forecasts; we see year-average growth of 2% this year (RBA 13⁄4%), around 41⁄4% in 2012 (RBA 4%) and 31⁄4% in 2013 (RBA also 31⁄4%), but we have lower near-term inflation. Longer term, we expect above target inflation to re-emerge.